Nothing ventured, nothing gained

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Tax planning offers an opportunity to shine

Many of the smaller businesses that can benefit from VCT and EIS investment are quite different from larger listed companies, whose returns are largely influenced by the day-to-day ups and downs of the stock market. However, smaller businesses can come with their own challenges, including volatility, and are high-risk investments as a result.

VCTs and EISs offer a wide range of different investment mandates and underlying investment opportunities to meet different requirements. That said, the supply of underlying companies that qualify for VCT and EIS investment has been affected by the legislative changes that were announced during 2015.

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Investment flows

Governments frequently adjust the rules relating to tax-efficient investments, as a way of directing the inflow of investments into certain areas where it is needed. For example, renewable energy-generating companies have benefited greatly from government-approved tax incentives. So much so that these incentives have been deemed to have done their job. From 6 April 2016, energy-generating companies will no longer qualify for EIS tax incentives. This means there is a limited window of opportunity left for suitable EIS investors to take advantage of this proven opportunity in the current tax year.

As for VCTs, recent legislation changes included the stipulation that funds raised by VCTs can no longer be used for company acquisitions or management buy-outs. In some respects, the rules have been changed to make sure that VCTs focus on funding those companies that need it most. Some VCTs have had to restrict raising new funds while they look at adjusting their operating models. But for those VCTs that already operate at the early-stage end of the market, it remains business as usual. Therefore, this year is likely to be one where investor demand for the VCTs outstrips supply.

It would be remiss to not include inheritance tax as another important component within tax-efficient investing. In August 2013, the Government announced shares listed on the Alternative Investment Market (Aim) could be held in Isas. Many AIM-listed companies qualify for business property relief (BPR). Introduced in 1976, BPR was created to allow small businesses to be handed down through generations without incurring inheritance tax liabilities. Its scope has been widened in subsequent years, so that it is not just father-and-son-enterprises which are able to benefit. Shares that qualify for BPR fall outside the scope of inheritance tax as long as the shares have been held for at least two years, and are still held at the time of death.

VCTs, EISs and investments that offer BPR are high-risk investments. Those that do well achieve their objectives and have the potential to offer significant returns, but they do not all succeed. If your clients are not comfortable with the idea of investing in smaller companies that are not listed on the London Stock Exchange, then such investments are not right for them.